Dr. Bijan Vasigh Aircraft Finace Conference Las Vegas 10 2012

Dr. Bijan Vasigh Las Vegas, Nevada October 2, 2012

WWW.avionconsult.biz

Aircraft and Engine Finance and Leasing Americas Conference

Las Vegas, Oct. 1-4, 2012

Dr. Bijan Vasigh

Professor, College of Business

Embry-Riddle Aeronautical University

Daytona Beach, FL

(386) 871-5458

Factors Affecting Aircraft Value



Agenda:

• Industry key challenges

• Commercial aircraft manufacturing

• A methodology for aircraft valuation

• Factor affecting residual value

• Q&A.



Industry key challenges

• Every one-dollar increase in the price of oil adds $1.67 billion in

costs for the global airline industry

• The industry-wide fuel bill in 2011 was about $170 billion

• The outlook for consistently high oil prices and continued oil

price volatility presents some of the biggest challenges for the

world airline industry.

The demise of Delta Air Lines partner Comair was a result of high fuel

costs that made its 50-seat regional jets too expensive to fly.



Industry key challenges

• Volatile Demand

Very high elasticity of demand

Airlines can not increase ticket prices without an adverse

effect on revenue

Rigidity in Supply

Very high sunk cost

Expensive to dispose current fleet



U.S. Passenger Airlines: 1Q 2012

Index (2000=100)

0

50

100

150

200

250

300

350

400



Commercial aircraft manufacturing • Duopoly aircraft industry

• Early contributions to commercial aircraft industry

• Ford Tri-Motor

• Junkers German Transport

• North America

• Boeing Aircraft Company, McDonnell Douglas, and Lockheed

• Europe • Airbus

• Russia and Eastern Europe

• Regional jet

• ERJ, CRJ, MRJ, and SRJ



Aircraft value

• Base Value

o the appraiser’s opinion of the underlying economic

value of the aircraft

• Market Value

o reflect the state of supply and demand in the market

that exists at the time

• Actual transaction price



Financial Relationship

• Capital Cost

• Operating Cost

• Total Cost

Objective find the age that

that Minimizes total

cost

• JetBlue: 6.6 years average fleet age

• Singapore: 7.1 years average fleet age

• Allegiant: 22.1 years average fleet age



Aircraft value

• Direct operating costs

• Aircraft size/range Speed

• Engine type

• Technology

• Geographic distribution

• Convertibility

• Commonality

• In or out of production

• Number in service/on order

• Number of operators

• Market forecasts

• Number available

• Number stored

• Government regulations

• Reliability Manufacturer status

• Number of operators



Aircraft value

• The introduction of 737 max by Boeing will

drive the values of 737- classic and 737-NG

down deeply and quickly.

Boeing states the 737 MAX will have a 16% less fuel

consumption than the Airbus A320

and it will have 4% less than the A320neo.



Aircraft Valuation Model

1 2

1 2.....

(1 ) (1 ) (1 )

nAircraft n

NCF NCF NCFValue

k k k

Total revenue

β = block hours

RPM= Revenue passenger mile

RTM= Revenue ton mile

RRPM = revenue per revenue

passenger mile (passenger yield)

RRTM = revenue per revenue ton

mile (cargo yield)

AR=Ancillary Revenue



Direct operating costs

• Fuel Efficiency or Average Fuel Burn (Per Block Hour)

• Average Aircraft Utilization Block Hours

• Average Stage length

• Crew cost per Block Hours

• Depreciation per Block Hours

• Fuel cost

• Maintenance Cost per Block Hours



Total Costs: Variable direct operating costs.

Fuel and oil costs.

Flight operations.

Aircraft Fuel & Oil.

Insurance & Uninsured losses.

Lease/Rental of aircraft.

Flight Crew Salaries, Expenses and Training.

Direct engineering costs.

Airport and en route charges.

Passenger service costs.

Direct Maintenance.

Labor.

Repairs (by outside agencies).

Materials.

Fixed direct operating costs:

Aircraft standing charges.

Annual flight and cabin crew costs.

Engineering overheads.

Indirect operating costs (IOC)



Theoretical Value



$361.14

$2,241.39

$24.77

$528.91

$89.24

$214.67

$511.91

$2,005.59

$124.26

$353.67

$258.71

$148.52

Flight Crew Cost

Fuel Cost

Other Costs

Total Maintenance Costs

Depreciation

Aircraft Rent

737-700 Average Block Hour Cost Comparison in different airlines

LCCLegacy

0

200

400

600

800

1000

1200Average Flight Stage

Speed miles per BH

Utilization (RH/BH) *1000

Fuel gallons per BH

Utilization BH/ Day * 100

Fuel gallons per BH/Seat * 100

Legacy

LCC

Operational characteristics A319 in different



Theoretical Aircraft Value with varying Maintenance Costs:

A320-200



Net Aircraft Value Trend Changes

Discount Rate Fuel Cost Maintenance Pax Yield Block Hour

+/- 1% +/- 1% +/- 1% +/- 1% +/- 0.1%

Narrow Body

+ -5,403,298.86 -4,593,908.33 -1,771,205.98 17,973,530.99 1,940,246.46

A320-200

- 6,166,950.61 4,019,127.94 1,490,405.89 -15,821,149.01 -1,941,625.81

+ -3,843,702.44 -3,223,495.48 -1,253,483.90 14,047,543.89 1,578,608.41

B737-700

- 4,386,930.35 2,820,178.34 1,076,016.99 -12,327,185.36 -1,558,857.94

Wide Body

+ -12,994,586.12 -13,254,621.43 -2,850,478.44 48,316,100.60 4,643,621.30

A330

- 14,831,102.01 11,596,230.38 2,410,338.72 -42,398,979.69 -4,585,520.25

+ -12,753,536.92 -12,140,706.04 -3,496,076.36 44,273,757.28 4,554,906.01

B767-400ER

- 14,555,985.49 10,621,685.80 2,954,927.68 -38,851,689.45 -4,497,914.97



Residual Value

• Operation Cost, Capacity, Payload and Range

Blended Winglets has demonstrated drag reduction

between 5 to 7%, increases range and fuel efficiency

and consequently the residual value.



Thank You

and

Questions

Dr. Bijan Vasigh Aircraft Finace Conference Las Vegas 10 2012

Documents

Transcript of Dr. Bijan Vasigh Aircraft Finace Conference Las Vegas 10 2012